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Section 2 - What Are Taxes and How Should They Be
Levied?
“The hardest thing in the world to understand is the
income tax.” Albert Einstein
Taxes: The Price of Civilization
* there could be no public institutions, no ordered
society
*They supply revenues to support the functions of
government
*roads and bridges, and to fund welfare and public
services, such as education and health care.
*a tax may be placed on certain goods and services
to limit their use: cigs or alcohol
*can also be used to redistribute income
How Our Nation’s Founders Viewed Taxation
*. The colonists believed they should have a say in
how they were taxed. “No taxation without
representation” became a rallying cry for colonial
discontent
*Article I, Section 8, Clause 1: power “to lay and
collect Taxes, Duties, Imposts and Excises.”
two exceptions: country’s “common Defence and
general Welfare,” not for the benefit of individual
citizens. Federal taxes must be the same in every
state.
Adam Smith’s Four Tax Maxims
*guiding principles
*Equity: rich should pay a higher percentage of their
income in taxes than do the poor.
*Certainty: the taxes a citizen owes should be “certain,
and not arbitrary”… ought all to be clear and plain to the
contributor
*Convenience: the tax system should not be overly
complicated
The Tax Equity Debate: Who Should Pay and Why?
*The crucial issue in the tax equity debate is who should
pay
*ATP: that citizens should be taxed according to their
income
*BR: people who drive should pay for the upkeep of the
highway system, Gasoline taxes that fund road repairs, as
are highway and bridge tolls
Who Ends Up Paying Taxes and Why?
*Tax Incidence EX: occupancy taxes on the use of hotel
and motel rooms…. if a hotel lowers its room rates to keep
the cost to customers down, the incidence of the tax falls
at least in part on the hotel owner
*Most hotels simply add the tax, which is a percentage of
the room rate, onto a customer’s bill... When this happens,
the customer bears the burden
* tax incidence is affected by elasticity of supply and
demand.
* A tax that raises prices may drive some consumers out of
the market. If demand is inelastic, however, adding a tax to
the price of a good or service will have much less effect on
consumers’ willingness to buy.
*the burden of a tax will fall on the side of the market that
is less elastic.
*But if producers are more likely to abandon the market,
the incidence of taxation will fall more heavily on
consumers.
Taxes and Efficiency: Deadweight Losses and the Costs
of Compliance
*deadweight loss: a loss of productivity or economic
well-being for which there is no corresponding gain
*
*Taxes can create deadweight losses by reducing
people’s incentives to be as productive as they would
otherwise choose to be
*EX: overtime… will have to pay at least a third of
her earnings in taxes
* Every year, U.S. taxpayers spend many hours, and
often hundreds of dollars, preparing their income tax
forms
*
Progressive: Federal Income tax…a tax that takes a
larger share of income as income increases
Regressive: sales tax…a tax that takes a smaller share
of income as income increases
Proportional: Flat tax…a tax that takes the same
share of income at all income levels
Section 4 - How Do U.S. Governments Spend the
Revenue They Raise?
*Even with these four major taxes, the government
typically does not take in enough revenue to cover all
its expenditures. This gives rise to the federal deficit
* Federal borrowing takes place through the sale of
government bonds, which include Treasury bills,
savings bonds, and other government-issued
certificates of debt.
Federal Spending: Mandatory and Discretionary
*federal fiscal year begins on October 1 and is identified by
the year in which it ends. Fiscal year 2008, for example,
ended on September 30, 2008.
*Mandatory Spending: The only way for Congress to
change the amount of money allocated to mandatory
spending is to enact new legislation.
*Entitlement programs include Social Security, Medicare,
and welfare.
*The amount of money spent on such programs depends
on the number of people who sign up for them
*discretionary spending: expenditures that may be
raised or lowered as Congress sees fit
*By far the biggest chunk is spent on national
defense.
*The rest supports government funding for
education, scientific research, health care, and
foreign aid, among other activities
State and Local Government Revenue Sources
*Seven states, for instance, ban individual income
taxes
*Many states and localities require voters to approve
tax hikes through tax referendums
*Some states, such as California, require a two-thirds
majority of voters to approve increases in many types
of taxes.
Spending by State and Local Governments
*school children-2006 The average amount spent on
each of these students was $9,138 per year.
*More than 90 percent of that money came from
state and local governments.
*The ever-present challenge is finding the money to
pay for what the public wants.
*Because many state constitutions require balanced
budgets, states that run short of funds must either
raise taxes or cut programs